Financial Intelligence for Common Men

What is financial intelligence? How we common men can benefit from it?

How we can handle money which compliments the idea of financial intelligence?

Financial intelligence is slightly different from our normal intelligence.

Normally, we associate intelligence with “our ability to learn and apply new things in life”.

The definition of financial intelligence is similar. But to define it best, we need to add few more keywords…

“Financial intelligence is a way of life, which enhances our ability to make more money and build wealth in long term.”

What are the keywords here?

  • Way of life.
  • Make more money.
  • Build wealth.
  • Long term.

What does it mean?

Keep it simple…

Financial intelligence is not about being a mathematician, who can solve complex calculations related to investment.

It is more about living a certain way of life, with discipline related to money management.

When a person lives this way of life, following begins to happen as a byproduct:

  • Person starts to make more money.
  • Focus is more on wealth building.
  • Money is handled with a long term perspective in mind.

So people, who wants to sharpen their financial intelligence must first agree to change their “way of life”.

Yes, if we think that we will continue to live the way we do now, and earn more money/ build wealth, it will not happen.

Lets take an example:

What it takes to maintain a good health?

  • Disciplined diet and,
  • Specific workout.

This is the way of life for people who are health freaks.

If they do not follow this lifestyle, their health will no longer be good.

Similarly, to maintain good financial health one must have a specific way of life.

What way of life I am talking about?

A life which is bound with the following limitations.

  1. Purpose –  Earning money for a bigger purpose.
  2. Priorities – Knowing ones financial goals.
  3. Handling – Managing money smartly.

A person with sound intelligence lives a life of purpose.

He is very aware of his priorities.

His day to day activities reflect a style of handling which compliments his purpose and priorities of life.

In normal words we can say that…

“A financially intelligent person lives in a way where everything he does, adds more wealth to his kitty”.

#1. Traits of a financially intelligent person

As this person already has a purpose (final destination) fixed for his life, he is less likely to talk about random things.

His talks will be more focused on specific subjects.

His talks on the subject will be very in-depth.

But he will not share/talk freely about his purpose and goals. This will make people around him more curious.

Such a person also reads a lot on the topic of finance and wealth building.

He handles his money in a very specific way:

  • Follows an expense budget, and
  • Tracks all his income and expenses.
  • Always inclined to save money.
  • Invests the money that has been saved.

Such a person knows how difficult it is to generate money by self.

Hence every penny earned is spent wisely.

Having said that, one of the most important trait of a financially intelligent person is his affinity for financial freedom.

A financially intelligent person will naturally look for financial independence in life.

Such a person do not rely completely on only one source of income (like salary from job).

A financially intelligent person will often use words like:

  • Wealth, instead of money.
  • Sources of income, instead of salary.
  • Portfolio, instead of stocks/funds.
  • Warren Buffett, instead of Richard Branson.
  • Good Business, instead of good stocks.
  • Reading, instead of watching movies.
  • Solitude, instead of partying.
  • Investment, instead of trading/gambling.
  • Travel, instead of vacation.
  • Rest, instead of holiday.
  • Etc.

This list can be endless. But I think, I have made my point, right?

So lets move ahead and see why we need financial intelligence…

#2. Why financial intelligence?

This is where the “purpose” part gets answered.

We like intelligent people, right? But what is in them that attracts us towards them?

There is a charisma about them that makes them attractive.

Few such traits of a financially intelligent person is discussed in #1 above.

So it is only obvious to conclude that, when we meet a financially intelligent person, we want to become like them.

Suppose the God wants to grant you this wish, but he first wants to know something from you.

He ask you, “Why you want to become financially intelligent. What you want to achieve through this intelligence”.

I am sure God will not be joyed if you will say, “I want to impress people around me with my intelligence.”

The God actually wants to know the “Purpose”.

What “meaningful” you want to achieve with this intelligence.

Your answer can be anything (spiritual, selfish etc). But it must carry a deeper-meaning, which compliments the power of financial intelligence.

A financially intelligent person can think of a purposeful life like this:

  1. First, achieve Financial Independence.
  2. Secondly, build substantial Wealth.
  3. Parallelly, payback to the society.

So here is the bigger “purpose” of life. But this is like wanting the moon.

How to go about it? How to make it a reality?

Standing on ground and only dreaming to get to the moon will not work.

There must be an action plan. A detailed one.

What is the key in preparation on a detailed action plan? Milestones.

Finalize your milestones.

These milestones are like stepping stones. Step over one and get to the next.

This way, taking one step at a time will help you reach your ultimate goal of life (the purpose).

#3. Importance of Financial Goals?

Financial goals works like stepping stones to success.

In our lives we have multiple priorities like:

  1. Job/Work.
  2. Maintaining a decent standard of living.
  3. Health.
  4. Education.
  5. Social Expectations.
  6. Financial freedom/Wealth building.
  7. Payback to society.
  8. Etc.

Nothing can be ignored.

This is the main challenge for all of us in our day to day lives.

We all know that multitasking is something that does not come naturally to many.

This is where a financially intelligent person stand out from others.

There are several ways to handly multiple priorities.

But what has been generally observed in financially intelligent people are the following typical behaviours:

  • Thinking out of the box.
  • Likes to discuss and debate (peacefully).
  • Their ability to communicate (talk, write) is effective.
  • They can more easily influence others.
  • They delegate instead of doing all by self.

What these behaviours has to do with multiple priority management?

Think it over. All these habits helps him to do tasks faster and in a better way.

This is how intelligent people manage priorities.

But still there are chances of failures. Why?

If goals are not properly defined, there are chances of failure.

#3.1 Defining financial goals

An intelligent person defines his goals very accurately:

What is a key in defining a financial goal?

  • Setting up of time line and
  • Valuation of each individual goal.

Typically, financial goals should look like this:

Financial Intelligence for Common Men -1

Now, we know the importance of the following:

  • Setting a purpose of life
  • Identifying specific financial goals.

So now what is the next step?

The next step is to save more money, and investing the saved money.

But before we venture into money saving & investing strategies, we have to understand something important.

Without this, our attempt to accomplish financial intelligence will be incomplete…

#4. What is an asset? Most important lesson…

When the overall purpose of life is to achieve financial independence and wealth-building, one must know the following:

  • What is an asset?
  • Difference between asset and liability?

I have written a separate blog post on asset building, wherein the difference between asset and liability has been explained.

But let me explain the concept in short here as well.

Lets start with a quiz:

  • Is your motor vehicle an asset?
  • Your jewellery safely placed in a bank locker is an asset?
  • You house (self possession) is an asset?

None of the above is an asset.

These are all examples of liability. How?

As Robert Kiyosaki says, “Anything which takes away money from your pocket is a liability”.

Assets will always add money to your pocket.

So does it mean that anything which adds money to pocket is an asset? No.

To understand this more clearly, allow me to ask few more questions:

  • Is your job your asset?
  • A blogger can consider his laptop an asset?
  • For a cab driver, his taxi is an asset?
  • For a doctor, his clinic is his/her asset?

Job adds money to our pocket.

Laptop adds money to blogger’s pocket.

Taxi adds money to cab driver’s pocket.

Clinic adds money to doctor’s pocket.

But they are still not assets. Why?

As Robert Kiyosaki says, “An asset is something which adds money to ones pocket whether one is working or not”.

Such a money is called “passive income”.

Passive income continue to flow-in whether you are working or nor.

Passive income will continue to yield even when you are sleeping.

Things which generate passive income are called assets.

Examples of assets are as below:

  • Rental Property (Rent > EMI).
  • Dividend income from shares or mutual funds.
  • Interest from fixed deposit.

But there can be a counter question:

Money goes out from pocket to buy a property, stocks, mutual funds, fixed deposit etc. Moreover, there is also a risk of loss.

Then how can we say that Rental Property, stocks, funds, FD’s are assets?

The question is valid.

It is true that cash must be paid to own an asset. But this payment is made “only once”.

After the payment is made, hence forth the cash flow should only be “inside the pocket”.

Take example of a personal car. What happens here:

  • First we pay money to buy car.
  • Then each month we spend on fuel.
  • Annually we spend on maintenance.
  • Only when we sell car, there is some cash in hand.
  • Net cash outgo minus cash inflow is always positive.

Hence this car will always be a liability (till possession).

#4.1 Why it is important to understand what is an asset?

We buy a liability, thinking it to be an asset.

We often make this mistake.

Such mistakes reduces our ability to become wealthy.

How one can become wealthy?

By accumulating only assets.

It is these accumulated assets that has power to make one really wealthy.

To sum it up…

Financial intelligence cannot be built just by reading books.

One must also be ready to change the mindset.

Financial intelligence is not only about knowledge, it is a way of life.

What should be the way of life?

  1. Live a purposeful life.
  2. Have financial goals.
  3. Handle your money wisely.

For a financially intelligent person, the sole purpose of life should be to first attain financial independence.

To realise the goal of financial independence, clear and specific financial goals must be established.

But other important priorities of life cannot be ignored for the purpose of financial independence and wealth building.

Financially intelligent person has a personality and behaviour which helps him/her to balance all priorities.

Proper handling of money is also essential.

In the process of wealth building, the role of “asset accumulation” is also critical.

One cannot afford to make mistakes of continuing to buy liabilities, thinking it to be an asset.

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